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The Billion Dollar Interview with Gabriel Srour, Hedge Funds Co-CIO at Gávea Investimentos

Gávea Investimentos is a global alternative asset management firm founded in 2003. Today, Gávea manages approximately US$7 billion in assets under management (AUM) making it one of the largest Brazilian alternative asset managers. The firm was founded by Arminio Fraga, former Governor of the Central Bank of Brazil and former Managing Director at Soros Fund, and Luiz Henrique Fraga, former President of Latinvest Asset Management. Main lines of business are Global Macro Hedge Funds and Private Equity, currently accounting for around 90% of our AUM.  Over the last three years, we have added two new lines of business that have been consistently expanding: Public Equities and Real Estate. Each line of business has its own fully dedicated portfolio management team, which follows a diligent and research-based investment processes, seeking attractive risk-adjusted returns while maintaining a focus on capital preservation. In November 2010, a majority interest in Gávea was sold to the global asset management arm of J.P. Morgan Chase & Co.

Eurekahedge: Gávea Investimentos has an illustrious track record in the industry and is regarded as one of Brazil’s leading alternative investment managers. Please share with our readers a bit of history about the firm and how in particular you have diversified your portfolio across the various investment strategies over the years.

Gávea Investimentos was founded in 2003 by Arminio Fraga Neto, former Governor of the Central Bank of Brazil and former Managing Director at the Soros Fund and Luiz Henrique Fraga, former President of Latinvest Asset Management. The firm started with the launch of a Global Macro hedge fund with a focus on Emerging Markets. As the business successfully evolved, clients expressed the desire for investing in private equity in Brazil using our expertise. We then established in 2006 our Private Equity line of business which, as of May 2014, has completed 45 investments and 23 successful exits. Over the last three years, we have added two new lines of business that have been consistently expanding: Public Equities and Real Estate. Both of them follow Brazil focused investment strategies. Each line of business has its own, fully dedicated portfolio management team, which follow diligent and research-based investment processes seeking attractive risk-adjusted returns while maintaining a focus on capital preservation.

EH: Hedge funds, such as yours, which utilise macro strategies and invest with a dedicated emerging market mandate, are a rarity in the global menu of hedge funds. What prompted you to enter the industry with this unique proposition and how successful has it been over the years?

We have a natural Emerging Market DNA, being Brazilians. But our experience is not bound to Brazil. Some of us have extensive experience in other EMs, including co-founding partner, Arminio Fraga, so the decision to be in EM was a natural one. Still, we have reasons to believe this is one of the best regions to invest for a macro strategy. Stories are not as stable as in developed economies – some are developing quickly, others are giving away the achievements of recent years. And, for us, change means opportunity. So far, we are happy with our choice to focus on EMs, but we remain flexible and nimble to focus on the Developed Markets if and when the opportunity arises.

EH: Recently however, macro funds have struggled to deliver returns and had a lacklustre run in 2013. On top of this, emerging market mandated funds also saw headwinds triggered by the reduction in the Fed’s QE stimulus. How has the Gávea fund fared against this backdrop? And how do you account for the lull in the performance of global macro funds as of late?

This has been a tough year so far for macro and for us, and comes on the back of disappointing returns in 2013. There are several reasons behind it, and they apply to the industry as well as to us. The main one is the continuation of market trends beyond what we believe makes sense from a fundamental perspective. The continuous decline in US Treasury yields despite mounting signs of economic recovery, or the decline in implied volatilities even with several sources of uncertainty in the investment landscape are good examples. Some of the most attractive opportunities we identify at this point incur costs before they play out (such as negative carry or paying option premium). This makes for a still challenging short-term, although we see compelling risk-reward on a horizon of a few months.

EH: Could you share with our readers a breakdown of your asset allocation across investment regions and how this has evolved over the years? Do you foresee a greater allocation towards G7 economies moving forward?

We have historically been concentrated on Emerging rather than Developed Markets, and predominantly in Asia and Latin America. More recently, this split has been more balanced, as many of the themes that govern our portfolio are G7 in nature. But we do not expect the current picture to reflect the future. We are likely to once again have larger Emerging Markets exposure as some of the forces that prevailed in recent years – such as abnormally low interest rates – normalise.

EH: What classes of investors (fund of funds, high net worth clients, institutions, etc.) are the most aggressive in terms of allocations to your fund? In particular, are local investors based out of Brazil a substantial source of allocations to your fund?

We have a somewhat balanced client base, although funds of funds represent a smaller share today than in the past, while the most representative subscriptions in the last couple of years came from the institutional side. Brazilian clients are not so representative for our Global Macro hedge fund, but they are so for the Global Macro strategy as a whole (around 1/3 of the AUM), as it is offered also via  local, BRL-denominated funds.

EH: We understand that the fund maintains a significant exposure towards currencies and rates. In this regard, could you tell us about some of your key winning themes for these two asset classes over the years?

Some broad normalisation trends were big winners for our Global Macro fund in the past. That includes long rates in a number of EM where we found excess premium or the short in the US Dollar at the time of the twin deficits, mainly versus Asia. We were also pretty successful in some idiosyncratic, opportunistic trades, often shifting from long to short and vice-versa, or from one asset to another, in the specific country. Brazil, Mexico, Hungary and Singapore are examples.

EH: Building on the above, do you foresee any changes in your allocation across the various asset classes? With the Eurozone periphery stabilising and interest rates expected to move up, will sovereign credit capture a greater share of your overall portfolio?

We do not foresee a structural change in the relative importance of asset classes, although each of them may gain special attention at times. We believe currencies are likely to remain the largest one over the years, as they summarize country stories and have a relative value nature, allowing for a greater scope of positions. This should be of particular relevance in the coming years, as we expect a reversal of capital flows back into Developed Economies, after five years of outflows chasing higher yields.

EH: With the present movements across markets and underlying asset classes, generating attractive absolute returns is a risky business. What are some of the risk management tools and practices that you have put in place to safeguard the portfolio of your investments?

We have a strong culture of risk management and our primary parameter is stress testing. We believe understanding your downside and having confidence that you can navigate through stressful periods is paramount for long-term returns and the consistency of portfolio management. As such, we run simulations on a range of potential scenarios and also have portfolio-level stop losses in case a stress event takes place. As an example, our flagship fund within the global macro strategy has a stress budget of 15%.So far, our experience has reinforced our conviction in our risk management framework.

EH: In terms of the growth outlook, what are your expectations of emerging Asia and Latin America given they constitute the bulk of your portfolio allocations? In particular, has Brazil missed the boat on supply side reform? We believe a number of Emerging Markets – notably in these two regions – have missed a great opportunity to accomplish breakthroughs on the road to development. Instead, they used the liquidity bonanza of recent years to promote consumption or neglect long-term goals when defining investments. (There are exceptions, of course, such as Mexico.) Not only is liquidity likely to diminish, but also the strong tailwind of a buoyant China is fading. Therefore these regions are likely to remain important to our portfolio, but in the short run will probably on the short side.

Brazil is probably the best example, having missed a fantastic opportunity to continue the prudent work of the late 90s and early 2000s in the past five years. Things are deteriorating fast, but we believe there is still time to correct the economic path.

EH: Lastly, as the Fed continues it QE scale back and emerging economies are heartlessly weaned off their dose of cheap credit, what are some of the key macro themes that you feel will determine the returns for macro funds such as yours?

The US recovery and monetary policy, and the Chinese deceleration are probably the two most important economic forces we are monitoring. But other market forces are also important, such as the pricing of volatility, way too low, in our opinion, for the uncertainties that we identify. All in all, we believe that risks are skewed against Emerging Markets.

Contact Details
Diogo Aquino, Bernardo Carvalho or Julia de Luca
Gávea Investimentos
+55 21 3526 9150

This information has been prepared by Gávea Investimentos Ltda. in response to your specific request. This analysis is for informational purposes only. The information presented herein is confidential. By accepting this information, the recipient agrees that it will, and will cause its directors, partners, officers, employees, members, attorneys, agents and representatives to use this information only in connection with your current investment and for no other purpose. Furthermore, the recipient agrees that it will not divulge this information to any other party except as required by law.

Disclosures Risk Disclosures

This material is for information purposes only, is confidential and may not be reproduced or distributed except as otherwise provided herein. All information provided herein is as of the date set forth on the cover page (unless otherwise specified) and is subject to modification, change or supplement in the sole discretion of Gávea Investimentos Ltda. (“Gávea”) without notice to you. This information is neither complete nor exact and is provided solely as reference material with respect to the funds referenced herein. Defined terms are as set forth within.

Past performance is not necessarily indicative of future results. Performance for 2013 is estimated and unaudited. While this summary highlights important data, it does not purport to capture all dimensions of risk. The methodology used to aggregate and analyze data may be adjusted periodically. The results of previous analyses may differ as a result of those adjustments. The Fund is an actively managed portfolio and regional, sector and strategy allocations are subject to ongoing revision. Gávea has made assumptions that it deems reasonable and used the best information available in producing calculations above.

This material does not constitute an offering of any security, product, service or fund, including the Fund, for which an offer can be made only by the Fund’s Confidential Private Placement Memorandum (the “Confidential Memorandum”). The terms and risk factors of the Fund are set out in its Confidential Memorandum which is available to qualified prospective investors upon request. The contents hereof are qualified in their entirety by the Confidential Memorandum and subscription agreements of the Fund. The purchase of shares in the Fund is suitable only for sophisticated investors for which an investment in the Fund does not constitute a complete investment program and who fully understand and are willing to assume the risks involved in the Fund’s investment program. Generally, the Fund would include investors who are “Accredited Investors” under the Securities Act of 1933, “Qualified Purchasers” under the Investment Company Act of 1940, and “Qualified Eligible Persons” under Regulation 4.7 of the Commodity Exchange Act.

The shares have not been and will not be registered under the Securities Act of 1933, as amended (the “Securities Act”), or any state securities laws or the laws of any foreign jurisdiction. The shares will be offered and sold under the exemption provided by Section 4(2) of the Securities Act and Regulation D promulgated there under and other exemptions of similar import in the laws of the states and other jurisdictions where the offering will be made. The Fund will not be registered as an investment company under the Investment Company Act of 1940.

The shares are subject to restrictions on transferability and resale and may not be transferred or resold except as permitted under applicable statutes. In addition, such shares may not be sold, transferred, assigned or hypothecated, in whole or in part, except as provided in the Fund’s organizational documents. Accordingly, investors should be aware that they will be required to bear the financial risks of an investment in the shares for an indefinite period of time. There is no secondary market for an investor’s shares in the Fund and none is expected to develop. There is no obligation on the part of any person to register the shares under any statutes.

The performance results of certain economic indices and certain information concerning economic trends contained herein are based on or derived from information provided by independent third party sources. The Fund believes that such information is accurate and that the sources from which it has been obtained are reliable. The Fund cannot guarantee the accuracy of such information, however, and has not independently verified the assumptions on which such information is based.

Certain information contained in this material constitutes “forward-looking statements,” which can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “project,” “estimate,” “intend,” “continue” or “believe,” or the negatives thereof or other variations thereon or comparable terminology. Due to various risks and uncertainties, actual events or results or the actual performance of the Fund may differ materially from those reflected or contemplated in such forward-looking statements.

In the U.K., this is an unregulated investment scheme and as such it may only be promoted to limited categories of persons pursuant to the exemption contained in Section 238 of the Financial Services and Markets Act 2000 (the “Act”). Information contained herein may only be promoted to persons that are sufficiently experienced and sophisticated to understand the risks involved and who satisfy certain other criteria, as specified by regulations made under the Act and Financial Conduct Authority (“FCA”) rules. If you are in any doubt as to whether or not you fall within one of the categories of permitted persons, you should not solely rely on any information herein and should contact Gávea.

Please note the following Risks: Investors are strongly urged to carefully review the sections in the Confidential Memorandum titled “Risk Factors” and “Conflicts of Interests.” Among the risks involved in an investment in the Fund are as follows:

General/Loss of capital. An investment in the Fund involves a high degree of risk. There can be no assurance that the Fund’s return objectives will be realized and investors in the Fund could lose up to the full amount of their invested capital. The Fund’s fees and expenses may offset the Fund’s trading profits. Limited liquidity. An investment in the Fund provides limited liquidity since withdrawal rights are limited and shares are not freely transferable or redeemable. There is no secondary market for the shares in the Fund and none is expected to develop. Dependence on manager. The fund manager has total trading authority over the Fund. The use of a single advisor could result in lack of diversification and consequently, higher risk. Decisions made by the fund manager may cause the Fund to incur losses or to miss profit opportunities on which it would otherwise have capitalized. Volatility. Investment techniques used may include the use of leverage and derivative instruments such as futures, options and short sales, which amplify the possibilities for both profits and losses and may add volatility to the Fund’s performance. Potential conflicts of interest. The payment of a performance based fee to the Manager may create an incentive for the Manager to cause the Fund to make riskier or more speculative investments than it would in the absence of such incentive. Additionally, the fund manager is owned by JPMorgan Asset Management Holdings Inc. Valuation. Because of overall size or concentration in particular markets of positions held by the Fund or other reasons, the value at which its investments can be liquidated may differ, sometimes significantly, from the interim valuations arrived at by the Fund. Non-U.S. securities. The Fund will invest in foreign securities, which may include exposure to currency fluctuation, reduced access to reliable information, less stringent accounting standards, illiquidity of securities and markets, higher commissions and fees and local economic or political instability. Absence of regulatory oversight. The Fund will not register as an investment company under the U.S. Investment Company Act of 1940 or similar laws or regulations. Accordingly, the provisions of such laws and regulations will not be applicable.

The foregoing risk factors do not purport to be a complete explanation of the risks involved in an investment in the Fund. Investors should read the entire Confidential Memorandum before making investment determinations with respect to the Fund.


IRS Circular 230 Disclosure: Gávea Investimentos Ltda. and its affiliates do not provide tax advice. Accordingly, any discussion of U.S. tax matters contained herein (including any attachments) is not intended or written to be used, and cannot be used, in connection with the promotion, marketing or recommendation by anyone unaffiliated with Gávea Investimentos Ltda. of any of the matters addressed herein or for the purpose of avoiding U.S. tax-related penalties.

NOT FOR RETAIL DISTRIBUTION: This communication has been prepared exclusively for Institutional/Wholesale Investors as well as Professional Clients as defined by local laws and regulation.

The opinions, estimates, forecasts, and statements of financial markets expressed are those held by Gávea Investimentos Ltda. at the time of going to print and are subject to change. Reliance upon information in this material is at the sole discretion of the recipient. Any research in this document has been obtained and may have been acted upon by Gávea Investimentos Ltda. for its own purpose. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as advice or a recommendation relating to the buying or selling of investments. Furthermore, this material does not contain sufficient information to support an investment decision and the recipient should ensure that all relevant information is obtained before making any investment. Forecasts contained herein are for illustrative purposes, may be based upon proprietary research and are developed through analysis of historical public data.

Gávea Investimentos Ltda. is controlled by J.P. Morgan Asset Management which is the brand for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. This communication may be issued by the following entities: in the United Kingdom by JPMorgan Asset Management (UK) Limited; in other EU jurisdictions by JPMorgan Asset Management (Europe) S.à r.l.; in Switzerland by J.P. Morgan (Suisse) SA; in Hong Kong by JF Asset Management Limited, or JPMorgan Funds (Asia) Limited, or JPMorgan Asset Management Real Assets (Asia) Limited; in India by JPMorgan Asset Management India Private Limited; in Singapore by JPMorgan Asset Management (Singapore) Limited or by JPMorgan Asset Management Real Assets (Singapore) Pte Ltd; in Australia by JPMorgan Asset Management (Australia) Limited; in Brazil by Banco J.P. Morgan S.A.; in Canada by JPMorgan Asset Management (Canada) Inc., and in the United States by J.P. Morgan Investment Management Inc., JPMorgan Distribution Services Inc., and J.P. Morgan Institutional Investments, Inc. member FINRA/ SIPC.